Nonetheless, the same two questions apply to both categories: Are they viable? And, if so, do they benefit society? While humility requires that we not claim certainty about the answer to the first question, the second must be met with a resounding no. Crypto innovation undoubtedly has some valuable features — including blockchain-based applications, smart contracts, and decentralised finance — but the proliferation of private digital assets has also widened the gap between private and social interests.
To be sure, the welfare implications of cryptocurrencies are more complex for dysfunctional countries where the state expropriates individuals or companies through financial repression or other means, or uses transaction data to oppress political opponents or minorities. In these cases, cryptocurrency can technically replace US dollar banknotes and offer lower transaction and concealment costs. However, this specific use case does not vindicate cryptocurrencies, because other digital assets could perform the same function.
A pure bubble
Bitcoin is the archetype of an unbacked cryptocurrency with no intrinsic value. Its valuation represents what economists call a pure bubble: it will collapse if confidence evaporates. But not all bubbles burst immediately. Gold has been trading for millennia at prices far above its “fundamental” value (which could be measured by the price it would command for its industrial use if it were no longer held for speculative purposes). Yet history offers many examples of bubbles that ended in ruin — from the Dutch tulip mania of the 1630s to the South Sea Bubble of 1720 and the recurring stock-market and real-estate crashes that have been with us ever since.
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Could Bitcoin become the new gold? Possibly. But its value could also fall to zero. At most, we can be confident that very few of the hundreds of thousands of cryptocurrencies that have emerged will survive. It would be folly for regulated banks or insurance companies (whose losses are often borne by taxpayers) to speculate heavily in such assets without strict capital requirements.
The social damage stemming from unbacked crypto is clearer. Unlike productive risk-taking — such as research on vaccines or new technologies — speculation in digital tokens creates little public benefit and causes various harms. One cost is a diversion of seigniorage. In traditional systems, the gains from issuing money flow to the community via the state; but with crypto, that privilege is privatised or wasted: issuers reap the windfall, while “mining” (running computations to process blockchain transactions) wastes vast amounts of energy and computing equipment.
Another problem is crime. Bitcoin and similar assets are notorious for facilitating tax evasion, money laundering and illicit finance. While hard currencies have long been used for the same purposes, the ease and global reach of crypto transactions lower the barriers for wrongdoing. Then there are the implications for macroeconomic policymaking. Central banks can stabilise economies and prevent financial contagion only if they control liquidity during crises.
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In addition, unbacked cryptocurrencies lack any form of investor protection, as we saw during the initial coin offering (ICO) craze a few years ago. Heralded as a means of liberation from the power of financial intermediaries (from venture capital funds to banks), the direct issuance of securities to savers neglects the fundamentals of finance. Dispensing with trusted, well-capitalised and reputable intermediaries to monitor projects does not make markets freer; it makes them more fragile. Technological progress should improve financial efficiency, not roll back centuries’ worth of hard-won insights.
Full circle
Stablecoins were conceived as a response to the volatility of unbacked crypto. By pegging their value to the dollar or other safe assets, they promise the best of both worlds: the efficiency of digital tokens and the stability of traditional money. At first glance, this seems like progress. But financial history is full of supposedly safe innovations — money-market funds, structured securities, mortgage derivatives — that sowed the seeds of later crises. Stablecoins may do the same.
Proponents retort that stablecoins are fully backed by cash, bank deposits, Treasury bills or money-market funds, and that these reserves are regularly audited. Yet recent episodes cast doubt on such assurances. Tether, the largest stablecoin, was fined for misrepresenting its reserves and has never undergone a full independent audit. Circle, whose USDC is the second-largest stablecoin, had 8% of its reserves tied up in Silicon Valley Bank when that institution failed in 2023. The crisis was resolved only because uninsured depositors like Circle were bailed out with public funds.
Looking ahead, one can anticipate that the industry will eventually invest in uninsured bank deposits, riskier interest-rate bets and so forth. Institutions constrained to hold only low-yield securities often seek yield in disguise, taking hidden risks to increase returns.
Relatedly, while the Genius Act forbids issuers from paying interest on stablecoins, platforms are not bound by the rule. This loophole allows platforms to operate like banks without meeting the corresponding capital and liquidity standards. They have become yet another addition to the growing shadow banking system of institutions that rely on implicit public backing but escape prudential supervision.
Politics further amplify the risks. The current US administration’s endorsement of crypto is driven by a mix of personal financial interest, ideology and the need to reinforce global demand for dollars to finance America’s trade deficit. President Donald Trump has appointed regulators sympathetic to the industry to key oversight roles, and the traditionally pro-industry Commodity Futures Trading Commission, rather than the Securities and Exchange Commission, is likely to take the lead on regulation. All this ensures a light-touch approach that should worry other countries. If they attempt to regulate dollar-denominated stablecoins strictly, the US may accuse them of protectionism, as it has already done in response to the European Union’s regulation of Big Tech under its digital-market rules.
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Even when reserves are genuine, small doubts can trigger big runs, as when Lehman Brothers’ collapse in 2008 led to mass redemptions from US money-market funds, forcing the Treasury and Federal Reserve to intervene. The same thing happened in 2020, when the start of the Covid-19 pandemic triggered a “dash for cash”. A similar dynamic could easily occur with stablecoins if investors fear that the backing assets are insufficient or illiquid. Unfortunately, the Genius Act remains vague about stablecoin redemption rules.
Finally, stablecoins’ model of “narrow banking” — holding only safe assets like Treasuries — has systemic implications. If deposits migrate from banks to stablecoins, who will provide loans to businesses and households? By borrowing short and lending long, traditional banks perform the vital function of maturity transformation. Their activities are socially beneficial and the risks are made tolerable by capital requirements, supervision and deposit insurance. Stripping banks of deposits without replacing these safeguards would limit credit creation, increase financial vulnerability, and weaken the real economy.
The future of money
That said, stablecoins reveal a legitimate demand for payments that are faster, cheaper, and programmable (meaning they can execute automatically when contractual conditions are met). The competition to meet this demand pits three forms of digital money against one another: decentralised cryptocurrencies; privately sponsored currencies issued by corporations, such as Facebook’s short-lived Libra project; and state-backed digital versions of national money — which may take the form of public-private partnerships (Brazil’s Pix, India’s Unified Payments Interface) or a central bank digital currency (CBDC).
Sadly, if the US Digital Asset Market Clarity Act passes, the US will have handcuffed its central bank and prevented it from competing with privately provided money. This is unfortunate because central banks do have some competitive advantages. They define legal tender, can mandate participation by banks and fintech operators (as in Brazil or China), and ensure universal access. Above all, they embody the trust that our financial institutions badly need.
While the design of state-backed digital versions of national money raises many complex questions, a few key principles are readily identifiable. First, they must offer inclusive, user-friendly, very low-cost transactions for households, companies and government entities alike. Second, they must encourage private-sector innovation by opening APIs (application programming interfaces) that third-party developers can build on.
Third, they must carry over existing laws on the privacy of bank accounts. Fourth, they must avoid disintermediation because the state has very limited competence to lend to small- and medium-sized enterprises or to supply a range of financial services. Finally, a cautious approach would limit individual holdings and treat them as insured bank deposits, because another long-standing economic principle is that not all deposits in institutions, backed directly or indirectly by the state, are intended to be insured or demandable.
Public oversight, prudential regulation, and clear accountability are indispensable. Innovation should enhance economic fundamentals, not erode them. Speculative unbacked tokens and lightly regulated stablecoins must be contained before they threaten financial stability and become part of the shadow banking sector.
The future of money must be shaped by competition between private ingenuity and public purpose, not by rent seeking and dangerous speculative bubbles. If we remember that finance must serve society, not the other way around, the digital age of money can yet be a source of progress rather than peril. — © Project Syndicate, 2025
Jean Tirole, the 2014 Nobel laureate in economics, is a professor of economics at Toulouse 1 Capitole University
